Entertainment

Dear Foursquare: This Is Not the Right Time to Sell

The Social Analyst is a weekly column by Mashable Co-Editor Ben Parr, where he digs into social media trends and how they are affecting companies in the space.

It's undeniable: Foursquare is on fire in a way that no startup since Twitter has come close to achieving. It's changing the world and acquiring new users at a rapid place, so perhaps that's why it doesn't surprise us to learn that Yahoo is aggressively trying to acquire Foursquare.

According to Kara Swisher of AllThingsD, Foursquare and its founder Dennis Crowley have two options: raise more money from venture capital firms that would value the company at around $100 million, or be acquired by Yahoo for $125 million or more.

These are not small numbers and this is not an easy decision. The payday from Yahoo would be enough for most of the Foursquare team to be very happy for the rest of their lives. Any overtures from the Internet giant should be taken seriously.

However, if Crowley and the Foursquare team want to make the kind of worldwide impact that only a handful of people can claim to have achieved — all while building a company with far greater value than the money Yahoo is offering — then it needs to take venture capital money, forgo the immediate payday and amp up Foursquare's growth to the Facebook and Twitter level.

The Hit-or-Miss of Acquisitions

When a hot tech start is acquired by a major technology company, the results have historically been all over the charts. For every YouTube success (acquired by Google in 2006), there is a Jaiku failure (acquired by Google in 2007). Sometimes the additional resources of a major tech company can help spur an acquisition to greater heights, while other times bureaucracy can leave it to languish.

Unfortunately for Crowley, he's very familiar with the latter. Crowley's last company, Dodgeball, was in many ways the predecessor to Foursquare: It was a location-aware social network for finding interesting venues and notifying friends via text.

In 2005, Google acquired Crowley's startup. Instead of placing resources behind Dodgeball to develop its social networking capabilities, Google left it to languish in obscurity until it eventually shut down in 2009.

Yahoo's track record on acquisitions is also hit-or-miss. Since its inception, Yahoo has acquired more than 55 companies. Most of them have become the foundations of key Yahoo properties such as Yahoo Search, Yahoo Mail and Yahoo Fantasy Sports. Some, like Flickr, are running strong, while others such as Geocities, Broadcast.com and del.icio.us have either languished or been shut down.

If Foursquare's team cares about transforming the world with location-based social media — as all of our interactions with them have indicated — it should be very wary of losing its independence. Yahoo's track record is mixed.

Foursquare's Chances: What's the Payoff?

Let's say that Foursquare believes that Yahoo is a good fit for the company, and let's also assume that it has talked with Yahoo about ways to assure that the same mistakes that occurred with the Google-Dodgeball acquisition don't happen again. Is a $100 to $150 million payday a smarter deal than staying independent and taking a chance with the market?

To answer that question, you have to weigh potential against chance. Is the potential growth of the company worth the risk associated with trying to go it alone with Foursquare? How big could Foursquare potentially be?

Factors to consider:

Potential market size: Currently, Foursquare has almost one million users. But what is its potential market size? It's essentially everyone with a smartphone capable of GPS. And while that number is relatively small now, it's rapidly rising.

Competitors: Foursquare's primary competitor is Gowalla, but it has been breaking away from the app ever since the South by Southwest conference (SXSW) in March. It also faces competition from Yelp and potentially Facebook, which will likely reveal new geolocation features next week at its F8 conference. Yet despite these external threats, Foursquare has a commanding lead and all of the media's attention.

Potential worth: Foursquare is worth around $100 million currently — can it reach $500 million? $1 billion? $10 billion? Where is the ceiling?

Business model: Foursquare currently burns more cash than it takes in. Can it create a business model that will make it profitable and sustainable? I believe there's a ton of potential in location-based advertising, especially now that Apple and Google are helping pioneer this market.

Exit strategies:

If Foursquare were to turn down the Yahoo offer, who would be able to buy it? Or is there legitimate potential for an IPO?

These are complex issues, but if I were a betting man (and in fact, I am), I'd place my money on Foursquare being the next Twitter, rather than turning into the next Friendster. Its growth has only been accelerating and its profile has been rising rapidly. It has the opportunity to raise enough cash to build out the team and keep building up the userbase. It has the chance to stay independent and pursue its vision for a better-connected, mobile-centric world.

Here's the real reason why I believe in Foursquare, though: it directly addresses the human need to be social in a completely useful way. Facebook and Twitter revolutionized the world because they provided easier, more efficient outlets for socializing with friends and keeping up with what they were doing. Foursquare takes it a step further by factoring in our desire to know where our friends are on top of what they are doing.

Look: Foursquare is not my company, and I'd have a hard time making a decision if someone waved $125 million in my face. But if Foursquare's passion and goal is to make location-based social networking mainstream, then it's better off as an independent company where it can follow that vision unwaveringly.

If the groundswell of grassroots support that created Foursquare Day is any indication, the company has far more potential than the figures that are being thrown out now. This is the time to put the pedal to the metal, not the time to sell.

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